With reference to Table 1 below, Sunvic valuations seem very cheap. Below are my conservative assumptions.
Table 1: Sunvic earnings forecasts
| Years | FY11F Base | FY10F High | FY10F Base | FY10F Low | 1HFY10 Actuals | FY09 Actuals |
| *Sales (RMB m) | 2943.6 | 3,017.2 | 2,943.6 | 2,870.0 | 1,471.8 | 1,819.5 |
| **Net margin (%) | 12.5% | 12.0% | 10.5% | 9.0% | 10.6% | 21.5% |
| NPAT (RMB M) | 368.0 | 362.1 | 309.1 | 258.3 | 156.2 | 4.1 |
| ***No. of shares | 546.5 | 546.5 | 546.5 | 546.5 | 546.5 | 568.9 |
| EPS (S$ cts) | 13.5 | 13.3 | 11.3 | 9.5 | 5.7 | 0.1 |
| PE at S$0.405 (x) | 3.0 | 3.1 | 3.6 | 4.3 | 7.1 | 283.1 |
Source: Ernest
Some assumptions used in the above table
1. FY11F Base revenue is equivalent to FY10F Base revenue. A conservative assumption of no topline growth.
2. Net margin in FY11 is 12.5%, 1.5% higher than that of FY10F net margin. This is to take into account
a) Improvement in operational efficiencies after the commissioning of cracking plant which produces propylene (a key raw material used in the production of AA);
b) It is noteworthy that 2QFY10 net margin was 12.6%, 1HFY10 net margin was 10.6%. If 2QFY10 net margin is sustainable, my estimate of FY10 net margin of 10.5% would have been very conservative;
c) Also to take into account of any ASP increases which would likely translate to higher net margins.
Thus, based on a valuation perspective, Sunvic is trading at attractive valuations of 3.6x FY10F PE. It is also true that FY10 should be a record year for Sunvic. However, there are some noteworthy points to consider for a fundamental investor.
Noteworthy points
1. Limited growth in FY2011: According to Poems estimates, Sunvic is operating at close to max utilization in 1HFY10. I.e there wont be much growth in earnings in 2011, except for operating efficiencies and improvements in ASP if any. FYI, Company’s new AA plant Phase 1 will only commence commercial production in FY2012. There is not much info on this as in whether Phase 1 will commence in Jan 2012 or Dec 2012;
2. Volatile ASP: This makes forecasting of results difficult.
3. Cash tight: High gearing of 43% with RMB908.8M of loans due within a year. Their cash and cash equivalents only amounted to RMB694M. I.e they have to get refinancing on these loans. May not be easy to get good loans at attractive rates with their track record.
Secondly, mgmt did not disclose the capex required for the construction of the cracking plant. I read that it will commence commission towards end 4QFY10 but I am not sure how much capex they still have to put it prior to the commissioning.
Thirdly, mgmt also did not disclose the amount of capex required for the new AA plant which is 1.6x larger than its existing facilities. Shld not come cheap.
The aforementioned points indicate that Sunvic is likely to remain cash tight. With this, you may expect
a) Limited amount of dividends: the dividends that they can pay out would be little as they have lots of debt, plus in a capital intensive business.
b) Equity raising: This is likely through private placement, rights issue etc to raise funds.
Conclusion
With reference to Chart 1 below, share price has more than doubled since Jun. My personal opinion is that I am wary on the above point 3b and I would not invest, unless the above points are negated, or it is for a short term punt.
Chart 1: Sunvic’s share price dated 15 Sep 10
Source: shareinvestor
*This writeup is an abridged version of the original writeup which was sent to clients on 16 Sep.
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The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
Appreciate you sharing, great blog article.Thanks Again. Much obliged.